It's damp - needs a dehumidifer, etc.

The vast majority of potential tenants are all going to be retail (think antique store or clothes) or low-key office space....all very similar needs with minor TI costs. 

The math works.PLUS, apartment renters in this strata in Houston, (can't speak for other TX cities) IN GENERAL would rather spend their money NOT on a SFR, but on a NEW CAR, CLOTHES, etc. to keep up with Jones', when in fact they are entrenching themselves to become perpetual renters.

If tenants want cloth floor coverings tell them to use throw rugs.

IF it is damp or moist I would think potentially it can create a mold condition but from an old leak that dried up years ago highly unlikely......Sound slike this tenant wants to play hardball, well guess what?

Turns out the buyer was the head of a non profit that disburses clothing and furniture to the needy.

There seems to be an unusually high presence of individuals who are people of "the cloth" who live around that area of town. 

Now, dip the sponge in vinegar or ammonia and scrub gently in a circular motion. wash the walls and dry them with chamois cloth.

It has exceeded it's useful life and it is so much easier to replace it now, rather than waiting until it has leaked and ruined a tenant's clothes (water heater is in a closet).  

I started running a clothing brand and learned a lot from my venture.